Summary: This letter addresses
questions relating to the determination of consolidation loan interest rates under
the Federal Family Education Loan (FFEL) Program and clarifies the early repayment
option available to borrowers under Section 428(b)(7) of the Higher Education
Act of 1965, as amended.

Posted on 05-16-2005

Dear Colleague:

FFEL Consolidation Loan
Weighted Average Interest Rate

Consolidation loans have
fixed interest rates that are based on the weighted average of the interest
rates on the loans being consolidated. A lender can provide a new consolidation
loan borrower with the lowest statutory weighted average interest rate for loans
by using the lower of the weighted average of the interest rates on the loans
being consolidated as of July 1 or the date the lender received the borrower's
consolidation loan application. The lender should apply a consistent method
of determining when an application is received.

If a borrower specifically
requests that his or her loan be disbursed prior to July 1st, the lender should
honor the borrower's request, if possible.

This guidance is consistent
with the Department's treatment of consolidation loan interest rates for Direct
Consolidation Loans.

Permitting Borrowers
to Enter Repayment Early

Under the Higher Education
Act of 1965, as amended and the Department's regulations, a borrower can request
a repayment schedule that provides for repayment to commence at a date that
is earlier than six months after the date the borrower ceases to carry at least
one-half the normal full time academic workload. If the lender grants the request,
the loan enters the repayment period and the borrower waives any applicable
grace period. This is the case even if the borrower is currently enrolled in
school.

Such a borrower will be
eligible to obtain a consolidation loan to repay the loan on which early conversion
to repayment was granted, assuming all other eligibility criteria are met. As
stated above, the borrower waives any applicable grace period, now and in the
future.

If the lender determines
that the borrower is still enrolled, the lender can put the loan that will now
be in repayment, into an in-school deferment status at the borrower's request.
The interest rate on the loan would be the deferment rate. If the borrower consolidates
the Stafford Loan, the deferment interest rate should be used in calculating
the weighted average interest rate on the consolidation loan.

We have attached answers
to some questions submitted by the National Council of Higher Education Loan
Programs (NCHELP) that provide more detail on the issues addressed in this letter.
Should you have questions concerning the guidance provided in this letter, please
contact Pam Moran at (202) 502-7732 or George Harris at (202) 502-7521.